St. Louis Fed’s Housing Market Perspectives: Why Haven’t Mortgage Rates Fallen Further?

ST. LOUIS - Homeowners interested in mortgage refinancing and homebuyers calculating the monthly mortgage payment they can afford may be wondering why mortgage rates have not fallen as much as other interest rates during the recent economic downturn. William Emmons, assistant vice president and lead economist of the St. Louis Fed's Center for Household Financial Stability, asks, “Why Haven’t Mortgage Rates Fallen Further?” in the latest issue of Housing Market Perspectives.

Both the Federal Reserve’s short-term fed funds rate and the Treasury 10-year bond yield have declined by well over one full percentage point since the beginning of 2020. Meanwhile, the 30-year mortgage rate has declined by only about one-half percent. The result is that the difference, or spread, between the 30-year mortgage rate and the 10-year Treasury yield is historically large. This has limited the benefits that mortgage borrowers receive and has reduced the impact on the economy of the Fed’s aggressive monetary policy easing since the recession began.

Emmons explores two possibilities to explain the unusually large spread, corresponding to the wholesale and retail sectors of the mortgage market. He concludes that factors in the retail mortgage market, possibly related to difficulties faced by non-bank mortgage originators or servicers, are most likely the culprit.

Based on an examination of a similar episode during the 2007-09 financial crisis, he suggests the spread may narrow over time. If long-term Treasury yields remain very low, this would result in 30-year mortgage rates dropping below 3% for the first time ever.

For more on Emmons’ research, check out the latest issue of Housing Market Perspectives at: https://www.stlouisfed.org/publications/housing-market-perspectives/2020/why-havent-mortgage-rates-fallen-further.